/Fitch Ratings, Moscow/London, November 29, 13, heading by KASE/ – Fitch Ratings has revised the Outlooks on JSC IC Alliance Polis's (Alliance Polis) 'B' Insurer Financial Strength (IFS) rating and 'BB+ (kaz)' National IFS rating to Negative from Stable and affirmed the ratings.

KEY RATING DRIVERS

The Outlook revision reflects Fitch's reassessment of Alliance Polis's exposure to the reserving risk related to a single workers' compensation account written in 2011-2012. An independent actuarial review of the risk indicates that in the worst case scenario the exposure could be as high as the insurer's total equity. Although this scenario is not Fitch's expectation, the agency is concerned about the protracted uncertainty involved, given the ongoing litigation between the insurer and the large commercial policyholder.

Whether the ratings are downgraded over the next 12-24 months depends largely on the eventual outcome of the current litigation between Alliance Polis and its former policyholder. Conversely, the Outlook could be revised to Stable if the reserving risk is revised significantly downwards due to the implementation of favourable regulatory changes affecting this line of business which are currently under discussion.

Kazakh insurers have seen a significant increase in the number of individuals diagnosed with critical illnesses over the past few years. This has significantly affected the loss ratio of the workers' compensation business. Fitch understands that the government was notified of the issue and is considering changes to the regulation that would decrease the range of risks covered by the line and cap the maximum amount payable by insurers. There is no certainty these changes will happen, but Fitch believes there is a reasonable chance of implementation.

Under the insurer's 'best estimate' scenario, where the claims under single commercial account are limited to the notified claims reserve only, the risk-adjusted capital (based on Fitch's own assessment) supports the current rating. Under the 'worst case' scenario, the insurer's shareholder would have to significantly recapitalise the company. Alliance Polis statutory solvency margin stood at 374% of required capital at end-3Q13.

Alliance Polis's ratings also continue to reflect its negative operating profitability, in part related to operational challenges, and poor-quality investment portfolio.

Alliance Polis recorded a decline of gross written premium (GWP) by 7% and 43% decrease in its net earned premium in 9M13. Coupled with high administrative costs its expense ratio stood at 67% (9M12: 68%) indicating challenges in achieving operational efficiency. In 2012 the difficulties in expanding the insurer's operations were due to the merger with Pana Insurance, a change in management and loss of franchise. However, multiple changes in management continued in 9M13, indicating difficulties bedding down the insurer's operating model.

Poor profitability of workers' compensation line weakened the insurer's combined ratio, which worsened to 187.1% in 9M13 from 151.4% in 9M12, mainly reflecting the decline in the loss ratio to 107% in 9M13 from 68% in 9M12. At the same time, the insurer's key lines of business, compulsory motor third-party liability and health insurance (36% and 30% of GWP in 9M13, respectively), generated underwriting losses in 9M13.

RATING SENSITIVITIES

The ratings could be downgraded if the insurer faces claims in the workers' compensation line substantially in excess of its central estimate and this significantly damages its statutory solvency and risk-adjusted capital position, and the shareholder fails to provide support for the company.

The Outlook could be revised to Stable if the current litigation does not result in any substantial damage to the insurer's capital and its shareholder remains committed to the company.

Contacts: Primary Analyst Dmitri Zalesskiy Associate Director +7 495 956 5570 Fitch Ratings CIS Limited Valovaya Street, 26 Moscow 115054

Secondary Analyst Anastasia Litvinova Director +7 495 956 7082

Committee Chairperson Harish Gohil Managing Director +44 20 3530 1257

Media Relations: Julia Belskaya von Tell, Moscow, tel. + 7 495 956 9908/9901, julia.belskayavontell@fitchratings.com

[2013-12-03]